Reports indicate that cotton will be the first crop to recover from several years of liquidity crisis. Strong internal prices and an expected stable exchange rate have led farmers in Mato Grosso and Bahia to make plans to significantly increase acreage planted to cotton.
This increase is significant enough that, even with a slight decrease in area in the south of Brazil, overall area is expected to increase approximately 20 percent. As a result, Post has increased 2006/07 area to 1.03 million hectares (from 856,000 hectares in 2005/06) and production to 6.1 million bales (from 4.767 million bales in 2005/06).
The low production in 2005/06 (resulting from low prices) succeeded in raising domestic prices. As a result, it was more appealing for producers to sell in the domestic market, putting at risk approximately 460,000 tons worth of already-signed export contracts.
The Brazilian government decided to utilize PEPRO (Prêmio de Equalização pago ao Produtor), for which it had budgeted R$253.5 million (USD 118.6 million) in 2006, in order to allow the export contracts to be filled. PEPRO is a subsidy paid to the producer or cooperative to help them sell their product. The amount paid is the difference between the reference price (based on the minimum guaranteed price) and the highest bid at the government auction.
The recipient then has until a specified date to sell the product and provide proof to the government, with the required documentation determined by whether the product is sold within the state, sold outside of the state, or exported. By August 24, the government had spent R$209.3 million (USD 97.95 million) for 380.6 thousand tons of cotton.
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